SoFi settles with FTC over claims it inflated the average amounts borrowers would save by refinancing

A screen shot of SoFi's Super Bowl overtime commercial. The FTC announced a proposed settlement with SoFi Monday over claims the company inflated savings to borrowers.

Whether watching a baseball game, surfing the web or just picking up mail, it’s hard for student-loan borrowers to miss sleek, ubiquitous ads offering them the opportunity to whack giant chunks off their student-loan balance or monthly payments.

But if the offer seems too good to be true, that may be because it is.

The Federal Trade Commission announced Monday that it reached a proposed agreement with Social Finance, or SoFi, to settle claims made by the agency that for more than two years, the company misrepresented the average amounts borrowers would save by refinancing their loans with the company.

The FTC alleges that SoFi excluded certain categories of borrowers when calculating average savings to inflate the benefits of working with the company.

Since launching in 2011, SoFi has used happy hours, singles nights and other events to cultivate an image as a destination for High Earning Not Rich Yet — or HENRY’s — seeking an alternative to dealing with traditional financial institutions.

But the allegations described by the FTC paint a picture of a company using “one of the oldest tricks in the book,” to attract customers based on misleading claims, said Dalié Jiménez, a professor at the University of California-Irvine’s law school. Essentially, the FTC alleges that SoFi selectively excluded certain categories of borrowers when calculating average savings to inflate the benefits of working with the company.

Borrowers were told they would save more than $22,000 on average over the lifetime of their loan through SoFi. However, this excluded borrowers who refinanced into longer term loans than they had originally intended, the FTC alleges. Many of the borrowers excluded from the calculation pay more over the lifetime of their loan, according to the agency.

The nearly $300 per month borrowers were told they would save on average excludes borrowers who refinanced into a loan with a shorter term than their initial loan, the FTC claims. Many of the borrowers excluded from the calculation actually pay more money per month, according to the agency.

When SoFi disclosed the methodology the company used to arrive at the averages, it did so in fine print, the FTC alleged.

When SoFi disclosed the methodology the company used to arrive at the averages, it did so in fine print, the FTC alleged.

What’s more, borrowers who went to SoFi’s website to see if they qualified for a loan wouldn’t be told explicitly if refinancing with the company would cost them more than what they’re currently paying, the FTC alleges. When a borrower was pre-approved for a loan online that would cost them more either monthly or over the lifetime of the loan, the website displays the borrower’s savings as “$0.00,” instead of informing the borrower explicitly that they would pay more money, the FTC alleges.

A SoFi spokesperson said in a statement that the company is “pleased to have this matter resolved.” “We have always been committed to giving our current and prospective members clear and complete information with which to make smart financial choices,” the statement reads.

Mark Kantrowitz, the publisher of SavingforCollege.com, said he’s always been skeptical of claims from student loan companies that they’ll save borrowers money with their product. That’s because in many cases, a lender will simply pull a lever on one of the terms of the loan that creates an impression of savings that’s much bigger than reality. For example, often the bulk of the savings borrowers receive from refinancing their student loans comes from a shorter repayment term — and higher monthly payments — not necessarily a lower interest rate, he said.

Often the bulk of the savings borrowers receive from refinancing their student loans comes from a shorter repayment term, not a lower interest rate.

“It certainly is a misrepresentation if you’re mischaracterizing the savings that people will typically get,” Kantrowitz said. “Even if they weren’t doing that, they’re still presenting an average and individual borrowers’ experience will vary from that average.”

Under the terms of the settlement, SoFi is not admitting or denying wrongdoing and won’t pay a fine. Instead, the company agreed to stop making what the FTC described as misrepresentations about how much money borrowers have saved or will save through refinancing with the company. The FTC is also putting lenders making similar claims on notice.

Rohit Chopra, an FTC commissioner and a former-student loan ombudsman at the Consumer Financial Protection Bureau, suggested in a statement that the settlement may not go far enough in preventing other companies from engaging in similar practices.

Limits to the FTC’s authority mean that the agency can’t seek civil damages in this type of case.

“Ideally, SoFi would pay civil penalties for violating the law,” Chopra said in the statement. He added that limits to the FTC’s authority mean that the agency can’t seek civil damages in this type of case, but he noted that the CFPB and states attorneys general have the authority to do so.

“In future matters where we are unable to obtain monetary remedies, we should carefully consider whether partnering with other law enforcement agencies can lead to better results for consumers and deter bad actors from violating the law,” he said in the statement.

Jiménez, a member of the founding staff of the CFPB, said she’s hopeful state attorneys general in particular will take a closer look at this situation — if they haven’t already — particularly given that the CFPB’s current leadership appears to be backing away from aggressively enforcing consumer protection laws.

“What would be great for these kinds of cases is if there was huge fine or a huge consequence of some type because it is too easy to do this and then too hard to go after all of the people that do this,” she said. “It’s so disheartening, or frustrating, that all they’re getting them to do is to stop lying.”

Get a daily roundup of the top reads in personal finance delivered to your inbox. Subscribe to MarketWatch's free Personal Finance Daily newsletter. Sign up here.

Jillian
Berman

Jillian Berman covers student debt and millennial finance. You can follow her on Twitter @JillianBerman.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.